Steven Chu Solves Utility Companies' Death Spiral

Utility companies have been looking for new regulations and higher connection charges to save them from a "death spiral" spurred by a surge in rooftop solar installations. Instead, says former Energy Secretary Steven Chu, they should get into the rooftop solar business.

Utilities are in danger of being FedExed, Chu said, "like the Post Office got FedExed," as rooftop solar modules drop in price.

"The cost of modules has plummeted. In California where I live, that means for $10,000 you can generate a lot of electricity. The cost of batteries is plummeting, so that in five maybe 10 years at the outside, a $10,000 or $12,000 system will allow me to go, on average, 80 percent off grid.

"That's pretty exciting. So this is a technology that could be disruptive to electricity production and generation."

The industry-funded Edison Electric Institute warned utilities of this scenario in a January 2013 report called "Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business" (pdf). Wall Street Journal reporter Liam Denning described this scenario, in which solar becomes increasingly attractive to the customers who can afford it, as a "death spiral" in December, and utility insiders have been echoing that phrase.

"They think they've got it solved," Chu said, but if utilities charge customers more to connect to the grid, those charges will also spiral—upward—as more customers install solar.

"They're in a flat to shrinking business, and as solar and batteries get cheaper and cheaper, they're going to see their customer base of the best customers" install solar, he said.

A Hawaiian utility has tried to slow the growth of solar. In December, Hawaiian Electric Company shut down rooftop solar installations, citing "grid stability."

"That's another bullshit argument," said Chu, a Nobel Prize winning physicist who served as energy secretary from 2009 to April, 2013. Solar installations don't threaten grid stability until they approach 20 percent of the customer base, Chu said. In Hawaii solar is at 2 percent.

(Hawaiian Electric disputes Chu's 2 percent figure, and spokeswoman Lynn Unemori says the company has not halted solar installations, but has adopted "a more cautious approach to applications for new PV systems on circuits with a large amount of PV already installed, solely for reasons of safety and reliability." See her statement in the comments below.)

"Instead of that, you need a better business model," Chu said. "So I'm telling utility companies, this is coming down the line, so let's think of a new business model where you can profit from this."

In Chu's business model, utilities will borrow money—because "utility companies get to borrow money as inexpensively as just about anyone in the United States"—to buy rooftop solar modules and batteries. Then they'll partner with private rooftop-solar installation firms—"because I don't expect a utility company to figure out how to do that"—to install rooftop panels and batteries at customer homes.

The utility will own the panels and batteries and sell electricity to the customers at a much lower rate.

Customers would not only get lower rates, they would get solar power without having to pay for installation, Chu said, and they would get a battery backup that can keep the lights on and the refrigerator running for up to a week in a power outage.

Utility companies, meanwhile, would benefit from a distributed network of panels and batteries "where they need it the most, at the end of the distribution system, for grid stability."

Chu's idea allows utility companies to expand without installing new transmission lines, completing environmental impact reports, "and all of that stuff," he said.

Chu said he began talking to utilities about this issue in roundtable discussions two years ago. He said he has received three kinds of responses:

"Tell us what to do."

"Deer in the headlights."

"We're going to fight this."

(I've sent an email to the Edison Electric Institute to see what they think of Chu's idea. I'll add their comments to this story when they respond.)

"This is not a radical model," Chu said, "this is the old telephone system model, where the telephone companies owned the phone, they rented you the phone for so long, they maintained it."

Chu made his remarks at an appearance at the University of Chicago in which he also skewered cable companies for wasting electricity in set-top boxes and lamented the Washington media for sensationalist reporting.

I've covered the energy and environment beat since 1985, when I discovered my college was discarding radioactive waste in a dumpster. That story ran in the Arizona Republic, and I have chased electrons and pollutants ever since, for dailies in Arizona and California, for al...